TSP Catch-Up Change in Process, Other Updates Pending

The TSP has issued proposed rules on its catch-up contributions feature, the first in an expected series of changes in the program this year to follow the expansion of withdrawal options last year.

In sum, the rules would end the need for those eligible to make such investments—those age 50 or who will be by the end of a calendar year—to make a separate selection once they have hit the standard investment limit for a year. About 5 percent of TSP investors hit the standard maximum (this year $19,500), most of them old enough to make catch-up investments, as well; of those, most in turn also hit the catch-up maximum ($6,500 this year).

ADVERTISEMENT

Under the rules, after reaching the standard limit, investments by those eligible to make the additional investments would “spill over” and automatically be deemed catch-ups, up to that limit. The change would be effective in at the start of calendar year 2021, as the TSP had earlier indicated.

The TSP also previously announced that effective in October, newly hired employees will begin investing 5 percent of salary by default, rather than the current 3 percent. As under current policy, those new employees could increase or decrease their investment rate, including stopping it entirely.

Also coming, although with no schedule announced, is the launch of new lifecycle L funds and the end of one of the current funds, the 2020 target date fund. That will be merged with the Income fund; the two now have virtually the same mix of investments in the basic five TSP funds. Currently, the TSP offers lifecycle funds in only 10-year increments through 2050, but at that time it will offer funds in five-year increments from 2025 through 2065.

The TSP meanwhile still has not issued guidance on the impact of several changes in tax law enacted late in 2019. One raises from age 70 ½ to age 72 the point at which retirees must begin taking certain minimum withdrawals from certain retirement savings accounts, effective with those who had not reached 70 ½ by the end of 2019. Another allows penalty-free withdrawals by those still working of up to $5,000 of expenses related to a birth or adoption. While the law did not specifically mention the TSP, it changes portions of the tax code that apply to it along with 401(k) and other employer-sponsored retirement savings programs.